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congressman Tom DeLay was indicted on money laundering charges, forcing him to step down as House Majority Leader. Money laundering is a serious charge -- in 2001, U.S. prosecutors obtained almost 900 money-laundering convictions with an average prison sentence of six years. The rise of global financial markets makes money laundering easier than ever -- countries with bank-secrecy laws are directly connected to countries with bank-reporting laws, making it possible to anonymously deposit "dirty" money in one country and then have it transferred to any other country for use. Money laundering happens in almost every country in the world, and a single scheme typically involves transferring money through several countries in order to obscure its origins. In this article, we'll learn exactly what money laundering is and why it's necessary, who launders money and how they do it and what steps the authorities are taking to try to foil money-laundering operations. Money laundering, at its simplest, is the act of making money that comes from Source A look like it comes from Source B. In practice, criminals are trying to disguise the origins of money obtained through illegal activities so it looks like it was obtained from legal sources. Otherwise, they can't use the money because it would connect them to the criminal activity, and law-enforcement officials would seize it.
http://money.howstuffworks.com/white-collar-crime.htm
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Placement - At this stage, the launderer inserts the dirty money into a legitimate financial institution. This is often in the form of cash bank deposits. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions.
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Layering - Layering involves sending the money through various financial transactions to change its form and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money's currency, and purchasing high-value items (boats, houses, cars, diamonds) to change the form of the money. This is the most complex step in any laundering scheme, and it's all about making the original dirty money as hard to trace as possible.
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Integration - At the integration stage, the money re-enters the mainstream economy in legitimate-looking form -- it appears to come from a legal transaction. This may involve a final bank transfer into the account of a local business in which the launderer is "investing" in exchange for a cut of the profits, the sale of a yacht bought during the layering stage or the purchase of a $10 million screwdriver from a company owned by the launderer. At this point, the criminal can use the money without getting caught. It's very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages. Money laundering is a crucial step in the success of drug trafficking and terrorist activities, not to mentionwhite collar crime, and there are countless organizations trying to get a handle on the problem. In the United States, the Department of Justice, the State Department, the Federal Bureau of Investigation, the Internal Revenue Service and the Drug Enforcement Agency all have divisions investigating money laundering and the underlying financial structures that make it work. State and local police also investigate cases that fall under their jurisdiction. Because global financial systems play a major role in most high-level laundering schemes, the international community is fighting money laundering through various means, including the Financial Action Task Force on Money Laundering (FATF), which as of 2005 has 33 member states and organizations. The United Nations, the World Bank and the International Monetary Fund also have anti-money-laundering divisions.
Money-laundering Methods
In 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for Colombian drug lord Jose Santacruz-Londono. People with a whole lot of dirty money typically hire financial experts to handle the laundering process. It's complex by necessity: The whole idea is to make it impossible for authorities to trace the dirty money while it's cleaned. There are lots of money-laundering techniques that authorities know about and probably countless others that have yet to be uncovered. Here are some of the more popular ones:
Black Market Colombian Peso Exchange This system, which the DEA calls the "largest drug moneylaundering mechanism in the Western Hemisphere" [ref], came to light in the 1990s. A Colombian official sat down with people in the U.S. Treasury Department to discuss the problem of U.S. goods being illegally imported into Colombia using the black market. When they considered the issue alongside the drugmoney-laundering problem, U.S. and Columbian officials put two and two together and discovered that the
same mechanism was achieving both ends. This complex setup relies on the fact that there are businesspeople in Colombia -- typically importers of international goods -- who need U.S. dollars in order to conduct business. To avoid the Colombian government's taxes on the money exchange from pesos to dollars and the tariffs on imported goods, these businessmen can go to black market "peso brokers" who charge a lower fee to conduct the transaction outside of government intervention. That's the illegal importing side of the scheme. The money-laundering side goes like this: A drug trafficker turns over dirty U.S. dollars to a peso broker in Colombia. The peso broker then uses those drug dollars to purchase goods in the United States for Colombian importers. When the importers receive those goods (below government radar) and sell them for pesos in Colombia, they pay back the peso broker from the proceeds. The peso broker then gives the drug trafficker the equivalent in pesos (minus a commission) of the original, dirty U.S. dollars that began the process.
Structuring deposits Also known as smurfing, this method entails breaking up large amounts of money into smaller, less-suspicious amounts. In the United States, this smaller amount has to be below $10,000 -the dollar amount at which U.S. banks have to report the transaction to the government. The money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a single person over an extended period of time.
Overseas banks Money launderers often send money through various "offshore accounts" in countries that have bank secrecy laws, meaning that for all intents and purposes, these countries allow anonymous banking. A complex scheme can involve hundreds of bank transfers to and from offshore banks. According to the International Monetary Fund, "major offshore centers" include the Bahamas, Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore.
Underground/alternative banking Some countries in Asia have well-established, legal alternative banking systems that allow for undocumented deposits, withdrawals and transfers. These are trust-based systems, often with ancient roots, that leave no paper trail and operate outside of government control. This includes the hawalasystem in Pakistan and India and the fie chen system in China.
Shell companies These are fake companies that exist for no other reason than to launder money. They take in dirty money as "payment" for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.
Investing in legitimate businesses Launderers sometimes place dirty money in otherwise legitimate businesses to clean it. They may use large businesses like brokerage firms or casinos that deal in so much money it's easy for the dirty stuff to blend in, or they may use small, cash-intensive businesses like bars, car washes, strip clubs or check-cashing stores. These businesses may be "front companies" that actually do provide a good or service but whose real purpose is to clean the launderer's money. This method typically works in one of two ways: The launderer can combine his dirty money with the company's clean revenues -- in this case, the company reports higher revenues from its legitimate business than it's really earning; or the launderer can simply hide his dirty money in the company's legitimate bank accounts in the hopes that authorities won't compare the bank balance to the company's financial statements. Most money-laundering schemes involve some combination of these methods, although the Black Market Peso Exchange is pretty much a one-stop-shopping system once someone smuggles the cash to the peso broker. The variety of tools available to launderers makes this a difficult crime to stop, but authorities do catch the bad guys every now and then. In the next section, we'll take a look at two busted moneylaundering operations.
TOM DELAY
In October 2005, a Texas county indicted U.S. congressman Tom DeLay on charges that included money laundering and conspiracy to violate election codes. (The conspiracy charge was later thrown out.) In Texas, candidates for legislature are not allowed to receive corporate campaign donations. The prosecution holds that DeLay took part in an alleged scheme to bypass that rule and hide the corporate origins of money that ended up in the hands of Republican candidates in Texas. The alleged laundering scheme involved sending corporate donations from Texas to the Republican National Committee headquarters in Washington D.C., and the RNC then sending an equal amount of money back to Texas for use in campaigning. Two of DeLay's aides and his top campaign contributor have already pleaded guilty in a separate probe to crimes including conspiracy; wire, tax and mail fraud; and corruption of public officials.
Some problems on a more local scale relate to taxation and small-business competition. Laundered money is usually untaxed, meaning the rest of us ultimately have to make up the loss in tax revenue. Also, legitimate small businesses can't compete with money-laundering front businesses that can afford to sell a product for cheaper because their primary purpose is to clean money, not turn a profit. They have so much cash coming in that they might even sell a product or service below cost. The majority of global investigations focus on two prime money-laundering industries: Drug trafficking and terrorist organizations. The effect of successfully cleaning drug money is clear: More drugs, more crime, more violence. The connection between money laundering and terrorism may be a bit more complex, but it plays a crucial role in the sustainability of terrorist organizations. Most people who financially support terrorist organizations do not simply write a personal check and hand it over to a member of the terrorist group. They send the money in roundabout ways that allow them to fund terrorism while maintaining anonymity. And on the other end, terrorists do not use credit cards and checks to purchase the weapons, plane tickets and civilian assistance they need to carry out a plot. They launder the money so authorities can't trace it back to them and foil their planned attack. Interrupting the laundering process can cut off funding and resources to terrorist groups. So the next question is: What are authorities doing to prevent money laundering?
pesos using the Colombian Black Market Peso Exchange. The operation ended with 40 arrests and the seizure of $10 million in drug proceeds and 3,600 kilograms of cocaine. Despite these victories, the truth is that no individual nation has the power to stop money laundering -- if one country is hostile to laundering, criminals simply look elsewhere for a place to clean their money. Global cooperation is essential. The most prominent international organization in this respect is probably the Financial Action Task Force (FATF), which has 33 member states and international organizations on its roster list as of 2005. The FATF issued the "40 Recommendations" for banks (there are actually 49 now, but the moniker hasn't changed) that have become the anti-money-laundering standard. These recommendations include:
Identify and do background checks on depositors. Report all suspicious activity. (For example, if a background check revealed that depositor A works in a steel factory, and he typically deposits $2,000 every two weeks, a series of 10 $9,000 deposits over the course of two weeks should raise a red flag.)
Build an internal taskforce to identify laundering clues. The "recommendations" are really more like rules than friendly tips. The FATF keeps a list of "uncooperative countries" -- those who have not enacted the recommendations. The FATF encourages its member states not to deal with those countries in financial matters. Other global organizations fighting money laundering include the United Nations, the International Monetary Fund, the World Bank, and smaller groups like the Caribbean FATF and the Asia/Pacific Group on Money Laundering. While increased worldwide efforts are making a small dent in the money-laundering industry, the problem is huge, and the money launderers are winning overall. Countries with bank-secrecy rules, which arguably have legitimate benefits to the honest depositor, make it extremely hard to track money once it's transferred overseas. Still, the FATF's uncooperative list has gone from 15 countries in 2000 to two countries (Myanmar and Nigeria) in 2005. By most accounts, this is a significant sign of progress. Only increased global awareness and cooperation can curb the success of the money-laundering industry. For more information on money laundering and related topics, check out the links on the next page.